The Beginning of a Uranium Turnaround by Nick Hodge

From PRINT EDITION MicroCap Review Summer/Fall 2015

Wednesday, November 11, 2015

When it comes to uranium, all the good news is buried beneath the headlines.

You've no doubt heard that uranium prices – and stocks – are depressed. They have been since the 2011 Fukushima disaster.

But have you heard that uranium prices have risen 30% over the past year?

Have you heard that uranium demand is set to outstrip supply starting as soon as this year year?

Have you heard that China alone has 28 nuclear reactors under construction, and another 100 planned? Or that it's spending $2.4 trillion to expand its use by as much as 6,600% in the years ahead?

These are just a few of the catalysts that will spur the bull market in uranium. And once that bull market gets going – I mean really gets going – it's going to run on for at least a decade.

Make no mistake, a 30% price spike is just the start. Over the next ten years, we're going to see uranium prices more than double, surging from less than $40 per pound today, to more than $80 per pound in just a few short years.

How much higher it goes from there is anyone's guess. But if you look at the underlying supply/demand dynamics, it's not hard to foresee a persistent r!!br0ken!!

Indeed, most analysts agree on a 40% increase in uranium demand over the next 10 years. But at current levels, uranium prices are too low to make mining the metal worthwhile. Worse than that, the five-year price swoon we experienced has been devastating for producers.

There's been a wave of mine closures and bankruptcies these past few years. There are just 20 companies mining uranium today, down from more than 500 at peak production.

That's right. The crash in uranium prices wiped 96% of suppliers from the market. Now, 80% of the world's primary uranium supply comes from just 10 mines. And future global supply is dependent on just five newly proposed projects.

That hasn't been a problem up until this point, because the world had adequate reserves to cover for declining production. But 2016 marks a huge inflection point for the industry. This is the first year that demand will actually exceed supplies, creating a 60,000-tonne shortfall by 2018.

And that shortfall will only grow from there, as more and more nuclear reactors come online.

That's the demand part of this equation.

See, the Fukushima crisis was enough to pause nuclear power development, but it didn't stop it. It was just a brief hiatus. And now nuclear power projects are coming out of hibernation.

Globally, 71 nuclear reactors are currently under construction, 165 are planned, and 315 are proposed. All those figures are greater than they were pre-Fukushima.

China – a country whose pollution problem has become a domestic health crisis and an international embarrassment – is leading the way. It's got 17 reactors in operation, another 28 under construction, and more than 100 planned.

As a result, China's uranium demand is set to soar 167%, from 6,296 tons per year now to 16,800 tons, by 2025. To put that in perspective, China only produces about 1,650 tons of uranium each year, or one-tenth of what it will soon need.

It's not alone, either.

India is in a similar situation. It's pledged to grow its nuclear power capacity from 5,000 megawatts, to 63,000 megawatts by 2030.

And Russia aims to boost the share of electricity it gets from nuclear power to 25% in that time, up from 16% now.

Great Britain and France — which already get 75% of their power from nuclear plants — recently signed a joint declaration of cooperation on nuclear energy. And Poland has plans to build two plants that will contribute 15% of its power supply.

Even Japan is restarting its reactors.

Yes, despite the horrible aftermath of Fukushima, Japanese policymakers say the country will still count on nuclear power for a quarter of its energy supply.

And right here at home, the U.S. has 99 operable reactors (the most in the world), five under construction, and 18 planned.

What all of this adds up to is soaring demand for uranium in the years ahead.

Industry consulting group UXC Consulting believes uranium demand will grow 61% by 2035 to 238 million pounds, up from 173 million pounds in 2014. And that may even be low-balling it.

An early-2015 Morningstar report declared:

We expect global uranium demand to rise 40% by 2025. Annual growth of 2.8% might not sound like a lot, but is massive for a commodity that has seen precious little demand growth since the 1980s. Consider that average annual copper demand growth of less than 3% from 2002 to 2012 was enough to drive a 336% price increase.

Mined supply of uranium will struggle to keep pace amid rising demand and falling secondary supplies. Low uranium prices since Fukushima have left the project cupboard bare. We expect a cumulative supply deficit to emerge by 2021.

These shortfalls should begin to have an impact on price negotiations in 2017 because utilities tend to secure supplies three to four years prior to actual use. We estimate prices must rise from $50 a pound to $75 a pound to encourage enough new supply.

Mined supply must rise. And in order for that to happen, prices must rise.

And they will, persistently, over the next decade.

Now is the time to get in.

Editor's Note: Nick Hodge bio (from www.OutsiderClub.com) Known for a “call it like you see it” approach to money and policy, his insights have led to numerous appearances on television and in various outlets on the Web, including the Business News Network and Yahoo!'s Daily Ticker.